The U.S. Bureau of Economic Analysis (BEA) reported on the 26th that the July Personal Consumption Expenditures (PCE) Price Index held at a 3.7% year-over-year increase, exceeding market expectations of 3.6%, while core PCE rose 3.3% year-over-year, in line with forecasts. The Federal Reserve's most closely watched inflation gauge has now remained above the 2% target for 65 consecutive months, underscoring persistent price pressures. The three major U.S. stock indices fluctuated near the flatline in early trading as investors also focused on Nvidia's post-market earnings report.
The data showed July PCE rose 0.2% month-over-month, beating economists' expectations of 0.1% and reversing June's 0.1% decline. Core PCE increased 0.2% month-over-month, matching estimates. Personal income rose 0.4% month-over-month, topping the 0.2% forecast; nominal consumer spending gained 0.2% month-over-month, but inflation-adjusted real spending was flat, reflecting a notable cooling in consumption momentum.
From a price structure perspective, gasoline and other energy-related product prices fell 2.7%, while furniture and durable household equipment prices declined 0.9%, driving goods prices down 0.1% in July. However, financial services and insurance prices rose 1.2%, and housing costs increased 0.3%, pushing services prices up 0.3% and offsetting the decline on the goods side.
LPL Financial Chief Equity Strategist Jeff Buchbinder said: "We are clearly still in a period of sticky inflation, which is putting temporary upward pressure on interest rates; rates are an important factor in keeping the equity bull market going."
According to LSEG data, following the PCE report, market expectations for a Federal Reserve rate hike in September rose from nearly 36% to approximately 40%. The CME FedWatch Tool also showed traders' bets on a September hike climbing to 40.1%, up from about one-third a week earlier. However, Northlight Asset Management Chief Investment Officer Chris Zaccarelli argued that the flat year-over-year core PCE reading would give the Fed more time to hold rates steady. He noted: "The number of dissents at the next meeting could increase because the month-over-month data is deteriorating, but we believe enough members of the Federal Open Market Committee (FOMC) will want to see more data before making a decision."
In late February of this year, the United States and Israel launched airstrikes against Iran, opening a six-month-long Iran war. The conflict disrupted nearly one-fifth of global oil supply, sending energy prices soaring and pushing PCE year-over-year growth to a three-year high of 4.1% in May. Although the U.S. and Iran briefly agreed to suspend hostilities, allowing oil prices to retreat, the two sides exchanged fire again in July, driving oil prices back up and impeding the disinflation process.
The Federal Reserve held rates steady for the fifth consecutive meeting at the end of July, but the decision was divided, with three officials voting in favor of a quarter-point hike. Meeting minutes showed most officials expected inflation to gradually ease by year-end, but "many" believed inflation could remain elevated, and further policy tightening might still be necessary if prices fail to cool.
Market attention was also fixed on Nvidia's post-market earnings. The AI chip giant slipped 0.7% in early trading, and any disappointment in results or guidance could reignite doubts about the sustainability of the artificial intelligence boom, setting the tone for tech stocks later in the week. TSMC's ADR oscillated near the flatline, while the Philadelphia Semiconductor Index edged down 0.4% in early trading.
Memory chip names were unusually stable, with Micron, SK Hynix ADRs, and SanDisk all posting gains of less than 1%. Meta slipped 0.3% in early trading after the company reached a settlement with a coalition of state attorneys general over allegations that its social media platforms are harmful to child users.
The Treasury market reaction was muted, with the 10-year yield at 4.645% and the 30-year yield flat at 5.175%. Investors will next turn their attention to Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole global central bank symposium on the 28th for clues on his policy stance toward stubborn inflation. Since taking office in May, Warsh has been cautious about policy direction, preferring to let the market set its own course.
The FOMC has no formal meeting this month, giving officials time to observe additional economic data before making their decision on September 15-16. Markets currently price in roughly a one-third probability of a rate hike at that meeting, with the highest odds of a hike falling in December.